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Thedeath of Kim Jong-il, themonstrous, madman dictatorof hostage nation North
Korea, creates tremendous uncertainty and risk for the region.
Yet one scenario, however optimistic, would be that somehow this
event puts North and South on the road to reunification. What
might that cost? Well, Germany has paid some $2 trillion over two
decades to reunify East and West. But keep in mind that East
Germany was only a fourth the size of North Korea. And much
richer, relatively. In 1989, East German per capita income was a
third of the West’s. The situation in Korea is much different, as
this analysis from theAtlantic Councilsums up:

North Korea’s per capita income is less than 5 percent of the
South’s. Each year the dollar value of South Korea’s GDP
expansion equals the entire North Korean economy. The North’s
population is half the South’s and rising thanks to a high birth
rate. North and South also barely trade with each other.

And what would it cost to raise the living standards of the
South?

More than a dozen reports by governments, academics and
investment banks in recent years have attempted to estimate the
cost of Korean unification. At the low end, the Rand Corporation
estimates $50 billion. But that assumes only a doubling of
Northern incomes from current levels, which would leave incomes
in the North at less than 10% of the South.At the high end,
Credit
Suisse estimated last year that unification would cost $1.5
trillion, but with North Korean incomes rising to only 60% of
those in the South. I estimate that raising Northern incomes to
80% of Southern levels—which would likely be a political
necessity—would cost anywhere from $2 trillion to $5 trillion,
spread out over 30 years. That would work out to at least $40,000
per capita if distributed solely among South Koreans.

Andthis 2004
papermakes
another estimate, keeping in mind South Korea’s GDP is around $1
trillion:

Our estimate of the reconstruction cost is 10 percent of the GDP
of South Korea for 20 years after reunification. In the base
case, we assume that 50 percent of the reconstruction cost is
paid by the government and the other half by the private sector.
Therefore, government expenditure on the reconstruction of the
North Korean economy amounts to 5 percent of South Korean GDP for
20 years after reunification.

Fun fact: Around the time of Mao Zedong’s death in 1976,notes AEI’s Nick
Eberstadt, North Korea was more educated, more productive and
(by the measure of international trade per capita) much more open
than China. Around that same time, in fact, per capita output in
North Korea and South Korea may have been quite similar. Today,
North Korea has the awful distinction of being the only literate
and urbanized society in human history to suffer mass famine in
peacetime.

So why is the economy so horrible?

1. Closer inspection strongly suggests that North Korea’s
long-term economic failure is directly related to the policies
and practices embraced and championed by the Pyongyang
government. North Korea’s current “own style of socialism” [or
Urisik Sahoejuui] is a grotesquely deformed mutation of the
initial DPRK command planning system, from which it fatefully and
increasingly devolved over time.

2. North Korea is still in principle a planned Soviet-type
economy: but for almost two decades it has in reality been
engaged in “planning without facts”, and even in “planning
without plans” (in the memorable phrase of Japanese economist
Kimura Mitsuhiko). In and of itself, this would be enough to
consign the North Korean economy to trouble. But to make matters
worse, North Korean leadership has insisted on saddling the
economy with a monstrous military burden under its campaign of
“military-first politics” [Songun Chongchi]. Further, in
contradistinction to virtually all other contemporary economies,
North Korean trade policy for almost two generations has
systematically throttled the import of productive and relatively
inexpensive foreign machinery and equipment, thereby guaranteeing
that the national economy would be saddled with a
low-productivity, high-cost industrial infrastructure of its own
making.

3. Add to this North Korea’s unrelenting war against its own
consumers (no other modern economy has ever seen such a low ratio
of consumer spending to national income, even at the height of
Maoism or Stalinism) and Pyongyang’s stubborn, longstanding
policy of “reverse comparative advantage” via a juche food policy
that attempts to devote no more funds to overseas cereal
purchases than foreigners pay for North Korean agricultural
products in a country where cropland is scarce and growing
seasons are short, and one begins to see how North Korean
leadership engineered the country’s remarkable Great Leap
Backward–and eventually, even a famine.

This post originally appeared on the online
magazine of the American Enterprise Institute.